How long you
should retain your personal income tax records? You may have to produce those
records if IRS (or a state or local taxing authority) audits your return or
seeks to assess or collect a tax. In addition, lenders, co-op boards, or other
private parties may require that you produce copies of your tax returns as a
condition to lending money, approving a purchase, or otherwise doing business
with you.
Keep returns indefinitely and the supporting records usually for
six years. In general, except in cases of fraud or
substantial understatements of income, IRS can only assess tax for a year
within three years after the return for that year was filed (or, if later,
three years after the return was due). For example, if you filed your 2015
individual income tax return by its original due date of April 18, 2016, IRS will
have until April 18, 2019, to assess a tax deficiency against you. If you file
your return late, IRS generally will have three years from the date you filed
the return to assess a deficiency.
However, the
three-year rule isn't ironclad. The assessment period is extended to six years
if more than 25% of gross income is omitted from a return. In addition, where
no return was filed for a tax year, IRS can assess tax at any time (even beyond
three or six years). If IRS claims that you never filed a return for a
particular year, keeping a copy of the return will help you to prove that you
did.
While it's
impossible to be completely sure that IRS won't at some point seek to assess
tax, retaining tax returns indefinitely and important records for six years after
the return is filed should, as a practical matter, be adequate. If you file a
return electronically, the company that prepared and/or filed your return is
required to provide you with a paper copy of the return. Be sure to get and
retain that copy.
Property Records
Records
relating to property may have to be kept longer. The tax consequences of a
transaction that occurs this year, such as a sale of property, may depend on
events that happened years ago. The period for which you should retain records
must be measured from the year in which the tax consequences actually occur.
Separation or Divorce
If separation
or divorce becomes a possibility, be sure you have access to any tax records
affecting you that are kept by your spouse. Or better still, make copies of the
tax records, since relations may become strained and access to the records may
be difficult. Copies of all joint returns filed and supporting records are
important, since both spouses are liable for tax on a joint return, and a
deficiency may be asserted against either spouse.
Your records
should include a copy of the divorce decree or agreement of separate
maintenance, which may be needed to substantiate alimony payments and
distinguish them from child support or a property settlement. Your records
should also include agreements or decrees over custody of children and any
agreements about who is entitled to claim an exemption for them.
Retain records
of the cost of all jointly-owned property. Also, get records as to the cost or
other basis of all property your spouse or former spouse transferred to you
during your marriage or as a result of the divorce, because your basis in that
property is the same as your spouse's or former spouse's basis in it was.
Electronic Records Storage
You may keep
your records in electronic form instead of or in addition to keeping paper
copies. The periods for which the records should be kept are the same as for
paper records. If your tax records are stored on your computer's hard drive,
you should back it up to an external storage device or on paper.
To safeguard
your records against loss from theft, fire or other disaster, you should
consider keeping your most important records in a safe deposit box or other
safe place outside your home. In addition, consider keeping copies of the most
important records in a single, easily accessible location so that you can grab
them if you have to leave your home in an emergency.
Loss of Records
If, in spite
of your precautions, records are lost or destroyed, it may be possible to
reconstruct some of them. For example, a paid tax return preparer is required
by law to retain, for a period of three years, copies of tax returns or a list
of taxpayers for whom returns were prepared. Most preparers comply with this
rule by retaining copies (sometimes for a longer period than the legally
required three years) and can furnish a copy if yours is not available.
Similarly, other professionals who assisted
you in a transaction may retain records relating to the transaction. For
example, a stockbroker through whom you bought securities may be able to help
you to determine the basis of the securities, and an attorney who represented
you in the purchase of your home may retain records relating to the closing.
Nonetheless,
because you can never be sure whether third parties will actually have the
records you need, the safest course of action is to keep them yourself, in as
safe a place as possible.
If you have any questions or wish to discuss this matter further, please
let us know.
